How To Buy A House: The Power of a Fully Underwritten Pre-Approval

One of the most  common missteps among buyers: shopping for homes and submitting an offer without a fully-underwritten pre-approval and with an approval  for only the offer amount. While this might seem logical at first, it's a strategy that can often backfire, especially in a competitive market. 

You’ve been told to not show a higher pre-approval for the offer because you are asking the sellers to bid you up. However, that’s not true. I’ll tell you how this flawed way has been propagated.

There’s a theory floating around about mortgage loan officers giving this strategy. Why? 

By limiting the pre-approval to a specific home, mortgage loan officers are able to control buyers. Most of the time the buyer does not have day to day conversations with the lender given that the pre-approval is usually active for 90 days. During this time, buyers might be looking into multiple lenders, and there would be no true way to find out if the buyer has gotten a house under contract. If the buyer has to ask for a pre approval every time the buyer makes an offer, well the mortgage loan officer is in control. That’s it.

Here's why you should always submit an offer with the highest amount you're qualified for, along with a fully underwritten pre-approval.

The Art of Financial Storytelling

Imagine your pre-approval as a story you're telling the seller. It's not just a number; it's a narrative about your financial strength, commitment, and vision. 

It's not just the highest bid that wins – it's also the most compelling one. When you show a pre-approval for the maximum amount you're qualified for, you're essentially showcasing your financial strength. It tells the seller that you are fit and are incredibly qualified to buy the property. This does NOT mean that showing your financial strength will cause sellers to ask for a higher offer price. Odds are if the seller wants they will counter for a higher price whether you tell them you’re financially qualified or not. Why build a story of “This is all we can afford “ vs “ We can afford more but this is what we think the home is worth?” Apart from that, counters are usually not initiated by sellers just wanting more money, it usually involves having multiple offers and the seller deciding to counter the top original offers. Even if you aren't at the top, you might have a second chance due to being qualified to the higher amount. If you don’t qualify based on your letter, why counter an unqualified buyer? (Context: this is for the majority of cases in which bids are competitive. If a house is not competitive and you want to build a story about being poor and barely scraping buy to make an offer, sure. Just keep in mind the original idea still persists - the seller wants to sell and move on. If you can barely afford it what if something goes wrong during the transaction period? Being barely qualified can make a seller fearful and a sellers agent will likely advice of the risks of accepting weak offers.)

Speed and Efficiency

Real estate transactions can be time-sensitive. If you're pre-approved for a higher amount and decide to increase your offer, you won't have to go back to your lender for a new pre-approval. This efficiency can be crucial in fast-paced negotiations, where every moment counts. Some offer negotiations happening late in the evening. Maybe the lender is available, but you don’t want to risk delays because you are waiting for the lender to send an updated pre-approval letter.

Why a fully underwritten pre-approval?

In California purchase contracts, there is a section to denote what type of qualifications you have for your lending.

Pre-Qualification:

In this stage, you simply input items like income, your credit score, debt, and available down payment. This is not verified by anyone other than you.

Pre-approval: 

At this stage, you start submitting documents like:

• Two years of tax returns

• W-2s and 1099s 

• Pay stubs

• Letters of explanation for gaps in employment

• Profit-and-loss statements for self-employed individuals

• Proof of other forms of income (real estate, child support, alimony, etc)

• Source of the down payment funds

• Bank statements

• Retirement or brokerage account statements

A pre-approval can be given with just a few conditions needed to be fully verified. At this stage the lender will also run your credit report and your qualification is verified.

Fully Underwritten Pre-Approval:

This goes more in depth with going over every single document you need for the lender to approve you. All the conditions still needed have been submitted. This can be as simple as the lender verifying where specific downpayment funds originated from, or any missing W-2s.

At this point, the only things missing in order for the lender to approve the mortgage is the 

Example of the language a fully underwritten pre-approved mortgage shows:

Example of what a pre-qualification shows:

Final Thoughts

It's important to remember that just because you're pre-approved for a higher amount doesn't mean you have to spend it all. It's a strategic tool to enhance your offer and position in the buying process. Always stick to your budget and financial plan, but use the full extent of your pre-approval as a negotiating asset.

Not having a fully underwritten pre-approval puts you at risk of losing your initial 3% deposit if you submit an offer and later find that you can’t perform on the contract. A fully underwritten pre-approval doesn’t just let you know that you are pre-approved, but it also allows you to be able to waive the mortgage contingency. In a competitive market, buyers will waive the mortgage contingency because they know they are fully qualified. By waiving the mortgage contingency, you are also able to compete with cash buyers that already don’t have to worry about the mortgage contingency.

Remember, each real estate transaction is unique, and it's crucial to consult with a professional advisor to tailor the strategy to your specific needs and circumstances.